Bubbly Banks

What happens when the government and the reserve bank make clear that they are willing to do everything to rescue insolvent banks? Of course, everybody jumps onto the bandwagon of risky investment banking. Now’s the time to party! Even conservative Wells Fargo is joining the party now. That’s not going to end well…

3 comments on “Bubbly Banks”

As banks fell deeper into the abyss, their managers took bigger risks. The risk du jour was junk bonds. If the bonds paid off, the managers were heroes. If the bonds didn’t pay off, the managers were criminals.

Certainly there was a lot of fraud and mismanagement, but a lot of bankers simply found themselves falling victim to systemic risk they couldn’t have predicted and acted out of desperation to save their banks, their jobs, or their reputations.

I wouldn’t say that they couldn’t predict the systemic risk, but they rather didn’t care to predict, because there was the implicit (and now it has become explicit) government guarantee in case of systemic failure. If you know that you are not responsible for that 1% of possible outcomes, then you don’t care to prepare yourself for it, do you?